Audit of Agricultural Advances and Other Priority Sector Advances Shashank Patki Chartered Accountant (All images from the internet)

History of Priority Sector 1968 Basic idea was discussed in NCC meeting 1972 Defined by an Informal study Group 1980 Proportion defined for Priority sector advances 2012 Guidelines revised

Priority Sector Concept Objective of priority sector lending program is to ensure adequate fund flows to some of the vulnerable sectors of the economy, which may not be attractive for the banks from the point of view of profitability. Typically, these are small value loans to farmers for agriculture and allied activities, micro and small enterprises, poor people for housing etc.

Priority Sector Wheel

Targets of Priority sector advances Categories Domestic commercial banks / Foreign banks with 20 and above branches (As on ) Foreign banks with less than 20 branches (As on ) Total Priority Sector 40%32% Total Agriculture 18%No specific target. Total Micro Enterprises 7% (March 2016) Advances to Weaker Sections 10%No specific target. The above numbers are a percentage of ANBC or Credit Equivalent of Off-Balance Sheet Exposure, whichever is higher.

Targets missed In case of shortfall in lending to priority sector, the commercial banks need to make contribution to the Rural Infrastructure Development Fund (RIDF) established with NABARD and other Funds with NABARD/NHB/SIDBI/other Financial Institutions, as decided by the Reserve Bank of India (RBI) from time to time. Non-achievement of priority sector targets and sub-targets will be taken into account while granting regulatory clearances/approvals for various purposes by the RBI.

Agriculture Advances Earlier distinction as Direct Advances and Indirect advances to Agriculture removed Redefined as Farm Credit, Agriculture Infrastructure and Ancillary Activities Farm Credit (i)Crop loans to farmers, which will include traditional/non-traditional plantations and horticulture, and, loans for allied activities. (ii)Medium and long-term loans to farmers for agriculture and allied activities (e.g. purchase of agricultural implements and machinery, loans for irrigation etc.) (iii)Loans to farmers for pre and post-harvest activities, viz., spraying, weeding, harvesting, transporting their own farm produce. (iv)Loans to farmers up to 50 lakh against pledge/hypothecation of agricultural produce (including warehouse receipts) for max 1 Year. (v)Loans to distressed farmers indebted to non-institutional lenders. (vi)Loans to farmers under the Kisan Credit Card Scheme. (vii)Loans to small and marginal farmers for purchase of land for agricultural purposes.

Agriculture Advances Agriculture infrastructure (i)Loans for construction of storage facilities (warehouses, market yards, godowns and silos) including cold storage units/ cold storage chains designed to store agriculture produce/products, irrespective of their location. (ii)Soil conservation and watershed development. (iii)Plant tissue culture and agri-biotechnology, seed production, production of bio-pesticides, bio- fertilizer, and vermi composting. For the above loans, an aggregate sanctioned limit of 100 crore per borrower from the banking system, will apply.

Agriculture Advances Ancillary Activities (i)Loans up to 5 crore to co-operative societies of farmers for disposing of the produce of members. (ii)Loans for setting up of Agriclinics and Agribusiness Centres. (iii)Loans for Food and Agro-processing up to an aggregate sanctioned limit of 100 crore per borrower from the banking system. (iv)Bank loans to Primary Agricultural Credit Societies (PACS), Farmers’ Service Societies (FSS) and Large-sized Adivasi Multi-Purpose Societies (LAMPS) for on-lending to agriculture. (v)Loans sanctioned by banks to MFIs for on-lending to agriculture sector as per the conditions specified in paragraph IX of this circular (vi)Outstanding deposits under RIDF and other eligible funds with NABARD on account of priority sector shortfall.

Agriculture Advances contd. Some of the loan products in the market: - Crop Loan / Kisan Credit Card Scheme - Warehouse receipts loans - Tractor Loans - Self Employment loans (Food and Agro Processing) Interest subvention Capital Investment subsidy

Agriculture Advances contd. Amount of Crop Loan - Income approach - Expense approach Scale of Finance Repayment period - Kharip and Rabi crops: Short duration crops - Sugarcane, Mango etc. Long duration crops

Agriculture Advances NPA NPA Short duration crops: Loan outstanding for more than two crop seasons Long duration crops: Loan outstanding for more than one crop season Restructuring of loans In case of Natural calamities, the banks may decide their own relief measures like conversion of short term facility into a term loan or re- schedulement of repayment period. In all these cases, the account is not treated as NPA.

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Audit of Loans to Micro, Small and Medium Enterprises Manufacturing sector Investment in plant and machinery Micro EnterprisesDo not exceed twenty five lakh rupees Small EnterprisesMore than twenty five lakh rupees but does not exceed five crore rupees Medium EnterprisesMore than five crore rupees but does not exceed ten crore rupees Service Sector Investment in Equipment Micro EnterprisesDoes not exceed ten lakh rupees Small EnterprisesMore than ten lakh rupees but does not exceed two crore rupees Medium EnterprisesMore than two crore rupees but does not exceed five crore rupees

Education Loan These are the loans given to ‘Individuals’ for educational purpose including vocational courses upto Rs. 10 lakhs (irrespective of sanction amount). Important to note that the definition of abroad/ in India is not defined. Disbursement of education loan Repayment and NPA

Housing 1. Loans to Individuals for ‘purchase/ construction’ -Rs. 28 lakhs in Metropolitan centres -Rs. 20 lakhs in others 2. Loans for ‘repairs’ -Rs. 5 lakhs in Metropolitan centres -Rs. 2 lakhs in others 3. Loans to ‘any governmental agency’ Slum clearance/ rehabilitation of slum dwellers (Rs. 10 lakhs) 4. Housing projects exclusively for economically weaker and low income groups (Cost per dwelling unit Max. Rs. 10 lakhs) 5.Loans to Housing Finance Companies for onlending for the purpose of purchase/ reconstruction/ slum rehabilitation etc. (Max Rs. 10 lakhs) 6.Outstanding deposit with NHB on account of priority sector shortfall.

Export Credit Domestic Banks: Incremental export credit over corresponding date of the preceding year, up to 2 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher, effective from April 1, 2015 subject to a sanctioned limit of 25 crore per borrower to units having turnover of up to 100 crore. Foreign Banks with more than 20 branches: The norm is as above but effective from April 1, Foreign Banks with less than 20 branches: 32% of ANBC or credit equivalent of Off Balancesheet items, whichever is higher.

Social Infrastructure and Renewable Energy Bank loans up to a limit of 5 crore per borrower for building social infrastructure for activities namely schools, health care facilities, drinking water facilities and sanitation facilities. Bank loans up to a limit of 15 crore to borrowers for purposes like solar based power generators, biomass based power generators, wind mills, micro-hydel plants and for non-conventional energy based public utilities viz. street lighting systems, and remote village electrification. For individual households, the loan limit for renewable energy projects will be 10 lakh per borrower.

Others Loans to ‘Individuals’ and Self-Help Groups (SHG)/ Joint Liability Groups (JLG) Max amount Rs. 50,000/- per borrower Loans to distressed persons [other than farmers- Max amount Rs. 1,00,000 per borrower to prepay their debt to non-institutional lenders. Overdrafts, Max Rs. 5,000 (per account), granted against Pradhan Mantri Jan-DhanYojana (PMJDY) Loans sanctioned to State Sponsored Organisations for Scheduled Castes/ Scheduled Tribes for the specific purpose of purchase and supply of inputs to and/or the marketing of the outputs of the beneficiaries of these organisations.

Weaker Sections Priority sector loans to the following borrowers will be considered under Weaker Sections category:- (a)Small and marginal farmers; (b)Artisans, village and cottage industries where individual credit limits do not exceed Rs. 1,00,000; (c)Beneficiaries under Government Sponsored Schemes such as National Rural Livelihoods Mission (NRLM), National Urban Livelihood Mission (NULM) and Self Employment Scheme for Rehabilitation of Manual Scavengers (SRMS) (d)Scheduled Castes and Scheduled Tribes; (e)Beneficiaries of Differential Rate of Interest (DRI) scheme; (f)Self Help Groups; (g)Distressed farmers indebted to non-institutional lenders; (h)Distressed persons other than farmers upto Rs. 1,00,000 per borrower to prepay their debt to non-institutional lenders; (i)Individual women beneficiaries upto Rs. 1,00,000 per borrower; (j)Overdrafts upto 5,000/- under Pradhan Mantri Jan-DhanYojana (PMJDY) accounts, provided the borrowers’ household annual income does not exceed 100,000/- for rural areas and 1,60,000/- for non-rural areas (k)Minority communities as may be notified by Government of India from time to time

Interbank transactions Investments by banks in securitised assets Transfer of Assets through Direct Assignment /Outright purchases Inter Bank Participation Certificates Priority Sector Lending Certificates Norms for on-lending to Micro Financial Institutions

Audit Pointers Selection of sample for carrying out testcheck will be important since the number of loans may be large but the amounts would be small. A register maintained for loan applications, sanction/ rejection can be used as a basis to understand the system followed at the branch (MIS in case of HO consolidation). End use of each loan is very important. The practice in vogue by the bank needs to be understood. Genuineness and valuation of security.

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